Chapter 4 Updated Slides

A county's balances in the general fund included the following:
Appropriations $745,000
Encumbrances 37,250
Expenditures 298,000
Vouchers payable 55,875
What is the remaining amount available for use by the county?
a. $353,875 b. $391,125
c. $409,750 d. $447,000
A county's balances in the general fund included the following:
Appropriations $745,000
Encumbrances 37,250
Expenditures 298,000
Vouchers payable 55,875
What is the remaining amount available for use by the county?
a. $353,875 b. $391,125
c. $409,750 d. $447,000
Budget: Appropriations $745,000

Activity: Expenditures - 298,000
Encumbrances: - 37,250
Remaining available appropriations $409.750
Chapter 4
Recognizing Revenues in
Governmental Funds
3
LEARNING OBJECTIVES
After studying Chapter 4, you should be able to :
Understand current financial resources and the MA basis
Understand economic resources and the full accrual basis
Explain distinction between the MA basis and full accrual basis of
accounting
Identify difference between exchange and non-exchange
transactions and related revenue recognitions
Identify main types of non-exchange transactions and their
revenue recognition
Financial Statements
Two types of financial statements:
Governmental Fund financial statements
o Basis of Accounting: Modified accrual basis
o Provides information relating to Inter-period equity
Chapter 5
Government-wide F.S.
o Basis of Accounting: Full accrual basis
Granof & Khumawala-6e

o Presents revenues and expenses from the perspective of the
entity as a whole and not of the individual funds.
5
Measurement Focus and Basis of
Accounting
Entitys measurement focus: What is being

reported upon?
Basis of Accounting: When transactions

and other events are recognized?
Governmental Funds
Measurement Focus: Governmental funds focus on
the flow of current financial resources
o Current financial resources include cash, receivables,
marketable securities, prepaid items, and supplies
inventories
o Capital assets such as land, buildings, and equipment are
NOT accounted for in governmental funds, but rather in
governmental activities
Basis: modified accrual accounting
7
Revenue Recognition
GAAP for revenue recognition is GASB Stmt. No. 33
Under modified accrual basis, revenue cannot be recognized until
they are both measurable and available to finance expenditures of
fiscal period. Collection of cash must be reasonably assured before
revenues can be recognized.
Available:
60 day rule has become the benchmark. But some governments
have also established 30, 90 days or 1 year time periods.
Two broad types of Transactions
1) Non-exchange Transactions--a government gives or receives
value without directly giving or receiving equal value in return.
2) Exchange Transactions: involve an entity giving or receiving
equal values in an arm's length transaction.
Four Categories of Nonexchange
Transactions
Imposed non-
Derived tax
exchange
revenues
transactions
Government-
Voluntary non-
mandated non-
exchange
exchange
transactions
transactions
CourseSmart
(A) Derived Tax Revenues
Derived (non-exchange) tax revenues represent
taxes imposed on or derived from exchange
transactions, such as commercial sales (sales
taxes), taxpayer income (income taxes), etc.
Revenues are recognized when measurable and

available.
(Sales and income tax revenues be recognized in
the accounting period in which the underlying
exchange transaction occurs provided they are 10
available.)
(A) Derived Tax Revenues- Examples
Sales tax:
In December 2014 merchants collect $20 million in sales
taxes. Of these, $12 million are collected prior to
December 15 and must be remitted by February 15, 2015;
the remaining $8 million must be remitted by March 15,
2015. Journal entry to record the sales tax:
11
Sales tax:
Governmental fund:
DR CR
Sales taxes receivable $20
Sales tax revenue $12
Sales taxes (deferred inow of resources) 8
To summarize December sales tax activity
12
Sales tax:
Governmental fund:
DR CR
Sales taxes (deferred inow of resources) 8
Government-wide:
13
Sales tax collected by another government: In November and
December 2014, merchants collect $20 million in sales taxes. Of
these, $5 million is remitted to the state as due by December 15,
2014; the remaining $15 million is due on January 15, 2015. The
state remits the taxes to the city 30 days after it receives them.
Journal entry to record the transaction:
Governmental fund:
DR CR
Government-wide:
14
Governmental fund:
DR CR
summarize December sales tax activity
Government-wide:
15
Governmental fund:
DR CR
summarize December sales tax activity
Government-wide: Same
16
Income Taxes:
In its scal year ending June 30, 2014, the state collects $95 billion in income
taxes for the calendar years 2013 and 2014. It refunds $15 billion of taxes based
on the returns led by April 15, 2014. As the result of audits of prior-year
returns, the state bills taxpayers $10 billion for earlier calendar years; it collects
$7 billion of this before its scal year-end and expects to eventually collect the
entire remaining $3 billion. Journal entry to record the transaction:
Governmental fund:
DR CR
Government-wide:
17
Income Taxes:
Governmental fund:
DR CR
Cash $87
T axes billed but not collected (a receivable) 3
Revenue from income taxes $87
Income taxes (deferred inow) 3
To recognize income taxes for the scal year ending June 30
Government-wide:
18
Income Taxes:
Governmental fund:
DR CR
Cash $87
Income taxes (deferred inow) 3
Government-wide:
Cash $87 19
(B) Imposed Non-exchange Revenues
These are assessments imposed on individuals and
business entities.
The most prominent of these are property taxes and fines.
o Property tax: It is the bread and butter of local
governments.
Classified as Ad-Valorem taxes (based on value), property taxes
are most typically levied against real property.
Special Assessment Special kind of Property Tax
Other types include:
o Fines & Forfeits
20
Property Taxes
The tax levy is the amount billed to taxpayers
Initial determination of required tax levy: Levy =
Revenues required Estimated collectible proportion
Current standards require that property tax revenues be
recognized in the budgetary period for which the taxes
were levied, provided they are measurable and
available. Available means receivable within the current
period or expected to be collected soon enough thereafter
to be used to pay liabilities of the current period. For
property taxes, GASB standards define soon enough
thereafter as within 60 days of year-end.
Property Taxes (contd)
The tax rate is the measure that is actually set by

legislative action, after the required size of the levy
is determined. Tax rate (per $100 or per $1,000 of
assessed valuation) = required tax levy assessed
valuation (see next slide for definition of assessed
valuation)
If tax rate exceeds the statutory limit it will be

necessary to reduce the required tax levy and
readjust the budget accordingly
Property Taxes (contd)
Assessed valuation is generally determined by an elected Tax

Assessor
Calculation: Assessed valuation =
estimated true value of taxable
property X assessment ratio
In many jurisdictions the assessment ratio is 1.00 (i.e., full
estimated market value); in other jurisdictions it might be some
fraction of full value
Illustrative Journal Entries
for Property Taxes
Assume revenues of $495,000 are required and it is estimated that 1%
will be uncollectible:
for Property Taxes
Levy = $495,000/.99 = $500,000
(ignore subsidiary ledger entry)
for Property Taxes
Levy = $495,000/.99 = $500,000
(ignore subsidiary ledger entry)
General Fund: Dr. Cr.

Taxes ReceivableCurrent 500,000
Est. Uncollectible Current Taxes 5,000
Revenues 495,000
for Property Taxes (Contd)
The required entry at the government-wide level is similar except for
that the credit is to General Revenues as follows:
Government wide Activities: Dr. Cr.

Est. Uncollectible Current Taxes 5,000
General Revenues
Property Taxes 495,000
Assume by the end of year $450,000 of current taxes have been collected,
the entry is:
General Fund and Governmental Activities: Dr. Cr.

Assume by the end of year $450,000 of current taxes have been collected,
the entry is:

Cash 450,000
The entry to reclassify uncollected current taxes to delinquent status at

year-end:

Taxes ReceivableDelinquent 50,000
Estimated Uncollectible Current Taxes 5,000
Estimated Uncollectible Delinquent Taxes 5,000
Interest and penalties of $500 are accrued on delinquent taxes, of which

10% is estimated to be uncollectible. (Ignoring subsidiary ledger entry)
General Fund: Dr. Cr.

Interest and Penalties Receivable on Taxes 500
Estimated Uncollectible Interest and Penalties 50
Revenues 450
The required entry to accrue interest and penalties at the government-wide
level is similar, except for the revenues account:
Governmental Activities: Dr. Cr.

Estimated Uncollectible Interest and Penalties 50
General RevenuesInterest and Penalties
on Delinquent Taxes 450
Write-off of uncollectible taxes. Assume

property taxes of $500 are written off, on
which accumulated interest and penalties
amount to $80. The required journal
entry is:
Estimated Uncollectible Delinquent Taxes 500
Estimated Uncollectible Interest & Penalties 80
Taxes ReceivableDelinquent 500
Fines and Forfeits
Fines are amounts assessed by the courts against
those guilty of statutory offenses and neglect of
official duties.
Forfeits arise from deposits or bonds made by

contractors, accused felons, and others to assure
performance on contracts or appearance in court.
Accrue if the amount is known prior to the receipt

of cash, which usually is not the case
34
Fines and Forfeits
In November 2014 police issued $200,000 in parking tickets. Of the nes
assessed, $130,000 are paid without protest by the due date of December 31,
2014. Of the balance, $4,000 have been protested and are subject to hearings. The
government estimates that an additional $18,000 will trickle in but will not be
available for expenditure in 2014. The balance of $48,000 will be uncollectible.
Fines and Forfeits
Governmental fund:
DR CR
Cash $130,000
Parking tickets receivable (not protested) 66,000
Revenue from parking nes $130,000
Parking nes (deferred inow of resources) 18,000
Allowance for uncollectible parking tickets 48,000
To summarize 2014 activity related to November tickets
Fines and Forfeits
Governmental fund:
DR CR
Cash $130,000
Parking nes (deferred inow of resources) 18,000
Government-Wide
Cash $130,000
(C) Government-mandated Transactions
These occur when a government at one level (e.g.
the federal or a state government) provides
resources to a government at another level (e.g. a
local government or school district).
Requires the recipient to accept and use the
resources for a specific purpose.
Recognition Standards
Government Mandated Transactions
Revenue from these transactions should be recognized
when all eligibility requirements, including time
requirements, have been met.
Example: Mandatory drug and alcohol abuse prevention
program for the schools (The DARE program in public
schools).
If the grant is a reimbursement grant, then recognize when

qualifying expenditures have been made by the recipient
organization.
(D) Voluntary Non-exchange transactions
These result from legislative or contractual

agreements entered into willingly by two or more
parties.
They include certain types of grants given by one
government to another and contributions from
individuals (e.g. gift to public universities).
Recognition Standards
Voluntary Non-exchange Transactions
Revenue from these transactions should be recognized
when all eligibility requirements between two willing
parties, including time requirements, have been met.
Example: State reimbursement to schools for portion of
special education costs incurred.
Reimbursement grant when qualifying expenditures have
been made.
Unrestricted Grant with Purpose restriction
Unrestricted grants and grants with a
purpose restriction are generally recognized
as revenue as soon as they are announced, if
their collectability is reasonably assured
42
Grant with Time Requirement
In October 2014 a school district is notied that, per legislatively
approved formulas, the state awarded it $15 million in assistance. The
funds, transmitted to the district in December 2014, may be used to
supplement teachers salaries, acquire equipment, and support
educational enrichment programs. The funds can be used only in the year
ending December 31, 2015.
DR CR
43
Grant with Time Requirement
approved formulas, the state awarded it $15 million in assistance. The
funds, transmitted to the district in December 2014, may be used to
supplement teachers salaries, acquire equipment, and support
educational enrichment programs. The funds can be used only in the year
ending December 31, 2015.
DR CR
Cash $15
State grant (deferred inow of resources) $15
To record the receipt of state funds in 2014
State grant (deferred inow of resources) $15

Grant revenue $15
To recognize grant revenue in 2015 44
Grant with Purpose Restriction
approved formulas, the state granted it $15 million to enhance its
technological capabilities. The funds, transmitted by the state in
December 2014, must be used to acquire computers but may be
spent at any time.
DR CR
Cash $15
Grant revenue $15
To recognize grant revenue (in a special revenue fund) in
2014
45
Reimbursement (Eligibility Requirement)
Grant
In December 2014 a city is awarded a grant of $400,000 to train
social workers. During December 2014 it spends $300,000 in
allowable costs, for which it is reimbursed $250,000. It expects to
be reimbursed for the $50,000 balance in January 2015, and to
expend and be reimbursed for the remaining $100,000 of its grant
throughout 2015. The city is subject to an eligibility requirement in
that to be eligible for the grant it must rst incur allowable costs.
46
Reimbursement (Eligibility Requirement)
Grant
In December 2014 a city is awarded a grant of $400,000 to train
social workers. During December 2014 it spends $300,000 in
allowable costs, for which it is reimbursed $250,000. It expects to
be reimbursed for the $50,000 balance in January 2015, and to
expend and be reimbursed for the remaining $100,000 of its grant
throughout 2015. The city is subject to an eligibility requirement in
that to be eligible for the grant it must rst incur allowable costs.
Expenditures to train social workers $300,000
Cash (or payables) $300,000
To record allowable costs
Cash $250,000
47
Grants receivable 50,000
Grant revenue $300,000
To recognize grant revenue
Unrestricted Grant with Contingency
Eligibility Requirement
In January 2014, a private foundation agrees to match
all private cash contributions up to $20 million received
by a state-owned museum during its 20142015 fund
drive. In 2014 the museum receives $14 million in
private cash contributions.
Grant receivable (foundation) $14

Grant revenue (foundation) $14
To recognize $14 million of a foundation grant
48
Donations of Land for Differing
Purposes
A builder donates two parcels of land to a city. Each has a
fair value of $4 million. The city intends to use one as a park
and to sell the other.
Land held for sale $4

Revenue from donations $4
To record a gift of land that the city sold within the availability period
Land held for sale $4

Donated land (deferred inow of assets) $4
To record a gift of land that the city sold after the availability period
but prior to the issuance of nancial statements 49
Intergovernmental Revenue
May be either government-mandated non-exchange transaction or
voluntary non-exchange transaction
Intergovernmental Revenue Include:
Pass-through grants
On-behalf payments
Restricted grant
Unrestricted grant
Contingent grant
Entitlements:is a government program guaranteeing access to some
benefit by members of a specific group and based on established
rights or by legislation
Shared Revenues
Payment in lieu of taxes: are Federal payments to local governments
that help offset losses in property taxes due to non-taxable Federal
lands within their boundaries.
Often the amount is known before the actual receipt of cash and thus
may be accrued under the modified accrual basis.
On-Behalf Payments
A state government is responsible for funding teachers health
insurance premiums. It contributes $3 million to the states health
insurance plan on behalf of an independent school district.
The school district would make the following entry:
Health insurance expenditures $3
State aidinsurance premiums (revenue) $3
To record the on-behalf insurance premiums paid by the state
Correspondingly, the state would also record an expenditure:

State aid to school districts (expenditure) $3
Cash $3
To record the insurance premiums paid on behalf of an 51
independent school district
2) Exchange Transactions
Transactions in which each party receives value
essentially equal to the value given
e.g. one party sells goods or services and the
other buys
Recognize the revenue when it is earned, and the

expense/expenditure when it is incurred.
Exchange-like transactions are those in which the

values exchanged may be related but not quite
equal.
Exchange vs. Non-exchange
Transactions
In exchange transactions, a government provides goods or
services to the provider in return for resources received.
Examples Include:
o License and Permits
o Charges for Services
Licenses and permits Example
In June 2014 a city imposed license fees on barber
and beauty shops for the rst time. It collected
$360,000. The fees are intended to cover the cost of
health inspections. The licenses cover the one-year
period from July 1 to June 30.
54
Licenses and permits Example
In June 2014 a city imposed license fees on barber
and beauty shops for the rst time. It collected
$360,000. The fees are intended to cover the cost of
health inspections. The licenses cover the one-year
period from July 1 to June 30.
Cash $360,000
Revenue from license fees $360,000
To summarize 2014 license fee activity
55
Charges for services
Many governments have shifted much of their

revenues from taxes on all taxpayers to charges to
recipients of services, including charges for
recreational services, building inspections, etc.
Accrue if the amount is known prior to the receipt

of cash
56
Miscellaneous Revenues
Revenues that do not fall into one of the other
categories.
Examples:
oProceeds from the sale of government assets
oInvestment income
In general accrue if the amount is known prior to

the receipt of cash; but usually accounted for when
collected in cash. 57
Sales of Capital Assets
When a capital asset is sold, financial resources
received are accounted for in a governmental fund,
but the assets that are sold are NOT.
This concept is reinforced by the journal entry on

page 158.
Remember that under Govt. wide model, the sale

of capital assets is recorded under the full accrual
basis of accounting. 58
Sales of Capital Assets
On December 31, 2014, a city purchases a new

police car for $40,000. On January 2,2015, the
vehicle is damaged in an accident. The vehicle
is uninsured; the city is able to sell the nearly
demolished vehicle for $5,000.
Cash $5,000
Other nancing sourcessale of vehicle $5,000
To record the sale of general capital assets
Investment Gains and Losses
Until 1993 both GASB and FASB required that short-term investments
be reported at either historical cost or lower of historical or market value.
FASB broke the tradition later on and required

business investment portfolio to be classified as:
o Trading Securities fair value
o Held-to-maturity
o Available for sale fair value
But for non-profits, FASB required that all debt and equity securities be
stated at fair value.
Gains and losses on investments both realized and unrealized must be

recognized and reported in the statement of activities.
The following table summarizes the 2014 investment activity in a countys general
fund (all amounts in thousands):
Fair Value Sales Fair Value

Cost on Jan. 1 Purchases (proceeds) on Dec. 31
Security A $120 $120 $140
Security B 520 540 540
Security C 200 200 $250 0
Security D 90 $90 75
$930 $860 $90 $250 $755
The following table summarizes the 2014 investment activity in a countys general
fund (all amounts in thousands):
Fair Value Sales Fair Value

Cost on Jan. 1 Purchases (proceeds) on Dec. 31
Security A $120 $120 $140
Security B 520 540 540
Security C 200 200 $250 0
Security D 90 $90 75
$930 $860 $90 $250 $755
Investments $55
Revenueincrease in fair value of investments $55
To record the increase in the fair value of the investments
INTEREST AND DIVIDENDS
On December 1, a town purchased a $1,000, two-year discount note
for $873, a price that reects an annual yield of approximately 7
percent. As a discount note, the security provides no periodic
payments of interest. However, assuming no change in prevailing
interest rates or other factors that would also affect fair value, the
notes fair value can be expected to increase by approximately $5
the rst month. On December 31, if the fair value of the note were
$878, the following entry would recognize the $5 of investment
income attributable in economic substance to the interest earned:
Investments $5
Revenueincrease in fair value of investments $5
To record the increase in the fair value of the investments
Summary
Current standards require that Sales and income tax revenues be recognized when
measurable and available.
property tax revenues be recognized in the budgetary period for which the taxes
were levied, provided they are measurable and available.
Fines are generally recognized on the cash basis.- dont have to look ataccruals or
a/t
Unrestricted grants and grants with a purpose restriction are generally recognized
as revenue as soon as they are announced, if their collectability is reasonably
assured.
Grants with eligibility requirements are generally recognized as revenue when all
eligibility requirements, including time requirements, have been met.
For reimbursement grants that generally means when the related expenditures are
incurred.
investment income, including changes in fair value, be reported in the operating
statement of the appropriate fund.
64
Unrealized holding gains and losses are netted against realized gains and losses
and included in the operating statement.
Dividends and interest are generally reported on the cash basis.
END OF CHAPTER 04

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A county's balances in the general fund included the following:

Budget: Appropriations $745,000

Granof & Khumawala-6e

Entitys measurement focus: What is being

Basis of Accounting: When transactions

Revenues are recognized when measurable and

The tax rate is the measure that is actually set by

If tax rate exceeds the statutory limit it will be

Assessed valuation is generally determined by an elected Tax

General Fund: Dr. Cr.

Government wide Activities: Dr. Cr.

General Fund and Governmental Activities: Dr. Cr.

General Fund and Governmental Activities: Dr. Cr.

The entry to reclassify uncollected current taxes to delinquent status at

General Fund and Governmental Activities: Dr. Cr.

Interest and penalties of $500 are accrued on delinquent taxes, of which

General Fund: Dr. Cr.

Governmental Activities: Dr. Cr.

Write-off of uncollectible taxes. Assume

Forfeits arise from deposits or bonds made by

Accrue if the amount is known prior to the receipt

If the grant is a reimbursement grant, then recognize when

These result from legislative or contractual

State grant (deferred inow of resources) $15

Grant receivable (foundation) $14

Land held for sale $4

Land held for sale $4

Correspondingly, the state would also record an expenditure:

Recognize the revenue when it is earned, and the

Exchange-like transactions are those in which the

Many governments have shifted much of their

Accrue if the amount is known prior to the receipt

In general accrue if the amount is known prior to

This concept is reinforced by the journal entry on

Remember that under Govt. wide model, the sale

On December 31, 2014, a city purchases a new

FASB broke the tradition later on and required

Gains and losses on investments both realized and unrealized must be

Fair Value Sales Fair Value

Fair Value Sales Fair Value

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